Real Estate Questions During a Global Pandemic
COVID-19 ‘s impact on our national and local economies is being particularly felt in the real estate sector, in standard commercial landlord/tenant settings and in cooperative and condominium buildings, especially those with commercial units. The implications extend to residential transactions, landlord-tenant issues, conveyancing and financing, among other areas, and drive at the heart of the real estate industry on local, regional and national levels.
1. Commercial Landlord-Tenant
The real estate sector has suffered significant disruption to its established “ecosystem.” Although there is much focus in the press on giving tenants a break (which may well be needed), the fact remains that landlords have to pay such hard cost items as real estate taxes, fuel, insurance and the like. In the commercial realm, too many retail spaces were empty even before COVID-19 erupted. Now, with social distancing and governmental restrictions, the interruption of customer traffic to businesses has seriously impaired tenant cash flow, not just for the “mom and pop” stores but also for large chains, which are “nonessential” under various governors’ orders.
This issue impacts all landlords, including cooperatives and condominiums that rely on commercial space rent, maintenance or common charges to meet their budgets, and their tenants, which often have little or no positive cash flow. Some of the questions this raises include:
- Can a commercial tenant withhold rent based on common law legal defenses such as impossibility, impracticality or frustration of purpose? Are local or state nonessential business closure directives a basis to withhold rent? What are those directives in a particular state or locality?
- Does a particular lease provide any shelter for the tenant in “force majeure,” “governmental requirements,” “condemnation” or “unavoidable delays” clauses? Are there provisions of the lease which assist landlords who demand that rent be paid?
- Does the lease or law require a tenant to give notice of a change in circumstances as a predicate to failing to pay rent, and how should a landlord respond to such a notice?
- What risk is a tenant taking in not paying rent? Can a landlord terminate its lease? Will a tenant jeopardize various rights which often require that it not be in default, such as the right to renew?
- What are a landlord’s pragmatic alternatives? While, in some jurisdictions, there is a court part dedicated to commercial landlord/tenant matters, how long will it take landlords to wade through an already overburdened court system? And what can a landlord do if a tenant files for bankruptcy protection?
- What are the best strategies for negotiating a resolution, and what are reasonable compromise positions for landlord and tenant, respectively?
- Does negotiating a suspension of rent, to be paid later, jeopardize the landlord’s position? If rent is suspended for six months and then repaid in the future, if the tenant declares bankruptcy, the repayment in the later months might be considered a “preference” under the bankruptcy law, which might allow it to be clawed back by the bankrupt estate.
2. Issues Unique to Co-ops and Condos
- In cooperatives and condominiums, all owners are to be treated equally. Can a board suspend the maintenance or common charge payments by some owners, but require others to make their payments timely?
- Some co-ops and condos have a very small reserve. Can they afford to temporarily suspend or forgive the payment of carrying charges when it might jeopardize the financial health of the building? How does the board weigh its options knowing that litigation to collect those charges may take time and money?
When closing a transaction, multiple parties and their lawyers commonly participate in the process. The current environment and social distancing guidelines force the following questions:
- Can the engineering report or appraisal, typically required by lenders, be completed with the current COVID-19 restrictions?
- Can a sale or mortgage financing of real estate be effected to completion? Is the title company open and operating? Will the local county clerk or other applicable recorder of deeds and mortgages accept documents for filing? Will the lender balk at closing due to the current circumstances? Is it logistically possible to get documents executed and notarized? Are there e-notary provisions in the applicable state or jurisdiction? Can the closing be done by correspondence?
- What are the parties’ rights to delay the transaction? Can the seller issue a time of the essence notice, and will the purchaser have contractual and/or legal defenses for delay?
4. Paying Debt Service
Tenant inability or unwillingness to pay full rent can leave landlords short of funds required to service their debt. Considerations of borrowers include:
- Is COVID-19 a defense to late or nonpayment of a mortgage debt?
- What laws, rules and regulations, if any, shelter the borrower from immediate lender action? Can a lender accelerate a loan? What should a borrower do if it receives a default notice from its lender? Will the lender be able to foreclose?
- What is the best method for reaching an accommodation with the lender?
- What federal, state and local options are available to help the borrower through this crisis?
At Armstrong Teasdale, we are uniquely positioned in most real estate sectors to confront the wide spectrum of issues this pandemic presents. Our “deep bench” is comprised of lawyers with significant, varied experience in commercial leasing, real estate conveyancing and financing, and co-op/condo law that can help answer these questions for our clients across the country. We are here to assist in mitigating the economic challenges presented by COVID-19. For additional information, visit Armstrong Teasdale’s COVID-19 Resource Center.